Focus on productivity after transformation to deliver better over time; ‘Add’ rating maintained with unchanged TP of Rs 1650
Shriram Transport Finance (STFC) and SCUF have announced a merger to create the largest retail NBFC operating in the lower-class sector. We do not find direct synergies in the near term due to the diversity of business lines; Focusing on productivity after business transformation will lead to improvement over time. Keep plus on STFC (fair value Rs. 1650; unchanged).
Shriram Capital and SCUF merge into STFC
Shriram Capital (SCL), Shriram City Union Finance (SCUF) and STFC have approved the scheme to merge SCL and SCUF into STFC, after separating all non-lending entities of SCL. After separating the non-lending entities, you will leave the SCL with only two holdings, ie. 26% in STFC and 33.9% in SCUF. Thus, for all practical purposes, this is a merger of STFC and SCUF, and the incorporation of SCL into the listed entity has no real effect.
Shriram Housing Corporation will remain a subsidiary (~85.02% ownership). The proposed combined entity will be renamed Shriram Finance and will have assets under management of approximately 1.6 trillion rupees. Mgmt expects the merger to be completed within 9-10 months.
Hard-to-Bake Operational Gains
The broad geographic footprint, focus on cross selling and potential synergies benefits (higher throughput of fixed infrastructure, better liquidity management, scope for credit rating improvement, etc.) are key factors for the proposed scheme, according to MGMT. In a conference call, MGMT highlighted that the merged entity will likely see approximately an additional 10% of PAT benefits from the cost of the merger (8% in the first year and 12-14% in the second year) due to the synergies in the proposed merger (mostly ) sell via). ~70% of this advantage will be realized due to the larger business volume led by the focus on cross-selling to existing customers (~2.1 for STFC and ~4.3 million for SCUF). In addition, superior liquidity management, lower financing costs (~30-50 basis points), increased cross-selling of third-party products (insurance), improved productivity and marginal cost rationalization (branch overlap of ~60-70) will help PAT.
The back-of-the-envelope calculation indicates that supplementary (average) sale volumes must be ~4-10% of AUM in FY2024e to achieve the desired result. Our consolidated financial statements reflect STFC + SCUF’s interim financial statements; We did not account for any significant improvement in operational or financial parameters (asset under management growth, financing advantages, cost synergies, etc.) due to the merger in the near term.
Keep an add on STFC
We maintain an add-on rating on STFC. Our fair value of Rs 1,650 (unchanged) captures the 1.35X book of Dec 2023 for the independent business of the combined entity and 2.75X for the multiple books (reflecting a higher growth runway) for the housing subsidiary. We assign a discount to the holding company of 10%.
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